Interest income is accrued on a time basis by reference to the principal outstanding and the effective interest rate applicable. Dividend income from investment is recognized when the shareholder’s right to receive payment is established.

3.Royalties are recognized on an accruals basis in accordance with the royalty agreement.

The entity may receive fees for allowing use of its asset, namely

Trademark

Patents

Brand Name

Copyright for music, books, motion picture films

Software, or right to use particular technology

Such fees are normally recognized in accordance with the substance of the agreement. In practices, the entity normally recognizes it on straight line basis over the life of the agreement.

Example: Royalties

Database4U Co. grants a license to a customer to use its web-site, which contains proprietary databases. The license allows the customer to use the web-site for a two-year period (1 January 2012 to 31 December 2014). The license fee of $72,000 is payable on 1 January 2012.

Solution

The substance of the agreement is that the customer is paying for a service that is delivered over time. Although Database4U will not incur incremental costs in serving the customer, it will incur costs to maintain it’s the web-site. The revenue from the license fees should be accrued over the period of the service agreement; therefore the fee of $72,000 received on 1 January 2012 should be recognized as a deferred income (liability). Further, each month the entity would release $3,000 deferred income and recognized as income to reflect the service that is delivered.

If the receipt of such fees is contingent on the occurrence of future event, the revenue is recognized only when it is probable that fees or royalty may be received.

Example: Royalties contingent on future service

MusicMedia plc, a film distributor, grants a license to a cinema operator to show film at its theatre. The terms of the agreement states that theatre will run 50 shows of the film in specified location in the following year in return for a percentage of the box office receipts. The distributor will license the film to other operators in other locations.

Solution:

MusicMedia should recognize the revenue on the dates the film is shown. In this case, MusicMedia plc can only measure the amount of revenue from license once the event has occurred, that is the film is screened. Here, the MusicMedia has not sold the rights to cinema operator, but assigned him the rights for specific period and specific location.